Real Cost Project: Barriers to Change

The social sector is in the midst of a radical transformation. In the past ten years, many of the fundamental underpinnings of the sector have shifted:

Most nonprofits in the state are operating with little or no safety net, with 53% of nonprofits report having three months or less of cash of hand. And for nonprofit organizations serving low-income communities, 60% of organizations reported having less than three months of cash readily available.

Governments at the Federal, state and local levels are changing how they fund and approach social problems – often resulting in less money for many nonprofits.

Government funders are trying to be “smarter” about allocating limited dollars; and trends such as “pay for success” are shifting the risk from government onto philanthropy.

Increased focus on collaboration and collective action presents incredible possibilities and significant challenges for the sector.

A blending of the social and capital markets driven by a new wave of donors is looking for innovative means to invest in social outcomes.

Technology and ‘big data’ are changing how organizations work, presenting a new set of opportunities and potential barriers.

The increase of big money in political campaigns is threatening to drown out the voices of those who lack the resources to compete.

However, grantmaking practices – especially around funding indirect and overhead costs – have failed to keep pace. And the consequences are being felt across the nonprofit sector as organizations report feeling the effects and are challenged to meet ever-growing demand for services. Roughly seven in 10 nonprofits in California say the government funding they receive fails to cover the full cost of their services, according to Nonprofit Government Contracts and Grants: California Findings a new report from the Urban Institute. A majority (64%) of California nonprofits reported that government contracts and grants pay only 10% or less for overhead costs.(Urban Institute, 2015).

Additionally, Nonprofit Finance Fund’s 2015 State of the Nonprofit Sector – a survey of more than 1,100 nonprofit organizations across the state of California – revealed that the top challenges faced by nonprofits include achieving long-term financial sustainability, attracting and retaining staff and raising funding that covers the full cost (Nonprofit Finance Fund, 2015 State of the Nonprofit Sector Survey). When organizations were asked if funding covered the full cost of achieving outcomes, the overwhelming answer was “No.”

Most nonprofits in the state are operating with little or no safety net, with 53% of nonprofits report having three months or less of cash of hand (Nonprofit Finance Fund, 2015). And for nonprofit organizations serving low-income communities, 60% of organizations reported having less than three months of cash readily available (Nonprofit Finance Fund, 2015). Lack of liquidity means scrambling to manage payroll, cutting or reducing programs, and reducing staff hours or eliminating staff positions. These organizations do not have the financial capital to withstand risk and adapt to changes in the communities they serve.

While nearly 80% of nonprofit organizations have reported an increase in demand, only 44% said they could meet that demand. Among organizations serving low-income communities, only 35% of nonprofits could meet the demand for often critical safety net services (Nonprofit Finance Fund, 2015). The result is that everyday people in our communities are being denied access to critical services from healthcare to workforce development to childcare.

Grantmakers participating in the Full Cost Forums recognized that funding indirect and overhead costs is important for supporting nonprofit health, but highlighted that there are no universal standards for calculating these costs or even common definitions of what they may include. A series of interviews among the funding community executed by the Full Cost Project also revealed additional challenges, including a lack of well defined policies to guide real cost evaluation and reimbursements, a reliance on individual staff members to make decisions around real cost funding, and funder practices driven and reinforced by cultural norms in the field.

Both funders and nonprofits agree that there needs to be a better understanding of the real cost of doing business as well as more open and transparent conversations between funders and grantees on what outcomes really cost. Heather Peeler, the Vice President of Member and Partner Engagement at Grantmakers for Effective Organizations, asserts that although challenges exist, the potential for real cost funding is greater alignment of a foundation’s values and practices. She describes full cost funders as partners in the grantmaking process, that initiate and encourage grantee discussion, understand grantee theories of change, strive for the maximumappropriate flexibility of funding and build internal capacity to understand the real costs of their nonprofits.